Last week’s macroeconomic data featured two crossed lines, namely the leading index (designed to forecast where the economy is headed) and the coincident index (designed to show how healthy the economy is today), according to the latest Conference Board Leading Economic Index (LEI) report.¹

When the economy is expanding, the “leading” portion tends to be higher than the coincident portion. That makes sense: It’s easy to be optimistic about the future when the economy is humming along fine. But when storm clouds appear on the economic horizon, caution tends to take over.  

Virtually every time since at least the early 1980s when those two lines – leading and coincident – have crossed over one another, recession has followed in very short order (or even preceded it). 

But here’s the thing: The lines crossed more than a year ago, and still no recession. In fact, Friday’s update represented only a very small widening of the negative gap between current and expected future conditions. We can speculate as to why this well-researched and time-tested recession signal has failed to produce the predicted recession in a timely way; my vote goes to the massively distorting impacts and the exceptional nature of the pandemic and the response that followed.

Speaking of important data, both the Producer Price Index (PPI) and Consumer Price Index (CPI) failed to generate much worry among economists or investors.

Here are the details: There was a brief reaction when the PPI numbers were released on Tuesday, because prices at the producer level rose 0.5% while economists were expecting something closer to +0.3%.² “Core” inflation, which removes volatile food and energy prices, was even worse relative to expectations. But on closer inspection, Tuesday’s PPI numbers also included a substantial downward revision of the previous month’s inflation numbers, which allowed markets to instead focus more holistically on two months of data rather than just one, and that message was far more benign. 

Various Federal Reserve speakers also passed up the chance to even hint that the Fed might find itself forced to raise rates, and so the market was able to look past both Tuesday’s PPI and Wednesday’s CPI report³ (which was generally better behaved than the PPI) with little more than a sideways glance.

But increasingly, the responsibility of carrying the U.S. economy forward will fall to the consumer. And here, last week’s data points were a little less encouraging: Wednesday’s retail sales report underperformed economists’ expectations by an even wider margin than Tuesday’s PPI surpassed them. Specifically, sales at the retail level in April were more or less flat compared to March, while economists were looking for a fairly robust increase of around 0.4%.⁴ Meanwhile, homebuilders – which in many ways represent the front line of consumer demand – also found little to cheer about. As with every month, the National Association of Homebuilders polled their members about trends they’re seeing among the homebuying public and released the results on Wednesday.⁵ The forward-looking component of the survey (expected single-family sales over the next six months) made the biggest negative contribution in what was clearly a downbeat month.

However, what people say and what they do are two separate things. Consumer sentiment has been both hot and cold at various points throughout the current cycle, with little substantial or persistent decline in overall consumer activity to show for it. That said, the Conference Board recently asked survey respondents a simple but insightful question: What, if anything, will you do to save money in the coming months? Roughly 45% – or nearly half – said they will cut spending on food away from home, while 20% – one in five! – said they plan to spend less on groceries.

If that intention is even partially true, then the long-awaited consumer slowdown hinted at in previous consumer surveys (but which has also never quite materialized) may finally be upon us. And if so, positive lines for the U.S. economy, chronicled above, might prove to be fleeting.

What to watch this week

The main event from the perspective of scheduled releases may be Wednesday’s minutes from the April 30 Fed meeting or Thursday’s flash PMIs. Friday’s early mid-afternoon close for the U.S. bond market in advance of Memorial Day holiday may also keep things somewhat sedate.

But the most imagination-capturing event on tap for this week may be Nvidia’s quarterly earnings results, scheduled for release after Wednesday’s close. Beyond the chipmaker’s results and forward-looking guidance, more important from my perspective will be how markets respond: If the company meets (or lags behind) expectations and the stock still rallies, we’ll know AI enthusiasm is intact. But if it beats expectations easily and sells off (or simply treads water), it might be a tell that valuation is full.

Also on the earnings docket this week are a number of retailers, including Target, Macy’s, Lowe’s and TJ Maxx. This week’s results may shed light on where retailers are sourcing any market share gains. Pay particular attention to forward-looking guidance by these companies for read-through.

Next up are a group of economic releases that will show how consumers and businesses are feeling about inflation. On Wednesday, the Atlanta Fed’s business inflation expectations survey will give a look into how businesses feel about current conditions, as well as what higher prices are doing to things like margins and sales. Then on Friday, we’ll get another update of consumer sentiment from the University of Michigan. While the headline of that survey always revolves around consumer attitudes in general, the most interesting aspect of the most recent UofM data from several weeks ago was a clear (and troubling) uptick in inflation expectations. Was that fleeting, or will this week’s update reinforce it? These questions matter, mostly because the Fed is acutely aware that perhaps the biggest risk at this stage of the cycle is that inflation expectations – not necessarily even inflation itself – become unmoored.

Finally, more than a few Fed speakers will make public remarks this week. As discussed above, last week’s commentary was notably benign and probably helped markets look past inflation data that was, at least at first glance, a little gritty. If any one of the dozen or so Fed speakers on this week’s schedule differ from the perspective that “higher for even longer” is for real but rate increases aren’t on the radar, markets may catch wind and react.